Unhappy Yahoo investors urge merger with AOL

Since taking over as CEO in 2012, Marissa Mayer has been working to revive Yahoo.
Richard Nieva/CNET

At least two of Yahoo's top ten stockholders want AOL to merge with and run the company, Reuters reported on Wednesday.

The investors are reportedly unhappy with the turnaround efforts of Marissa Mayer, who took over as Yahoo CEO in 2012 and has been striving to revive the company's sales and earnings. Though Yahoo's stock price has surged since Mayer took over, some investors believe the shares are still undervalued based on Yahoo's total business operations and its share of Chinese e-commerce giant Alibaba, Reuters said.

The two shareholders in question said they have have already met with AOL CEO Tim Armstrong and claim he's receptive to the idea of a merger and its possible benefits, according to Reuters. The shareholders said they came away from the meeting with the impression that combining the two companies could shave as much as $1.5 billion in expenses.

However, Armstrong has downplayed the notion of a deal, according to both the investors and two sources close to AOL, Reuters said. The two companies have not engaged in any official merger talks, and Armstrong said he would be receptive only to a "friendly deal."

Yahoo did not immediately respond to CNET's request for comment. AOL declined to comment.

"We believe a merger of AOL and Yahoo's core business may be one of the best ways to both fully seize the cost reduction opportunity and also to tax-efficiently monetize Yahoo's noncore equity holdings," Starboard Value said in its letter.

Why are investors calling for a merger between the two online companies?

Much of it has to do with Yahoo's stake in Alibaba.

On September 17, Alibaba raised $21.8 billion in the largest tech IPO ever recorded. After selling part of its stake in Alibaba, Yahoo's share in the company is now worth around $44 billion, though Yahoo's total market value is only $47 billion. Yahoo's email service, website and other operations could be worth an additional $7 billion. That has led some shareholders to gripe that the stock price is undervalued.

The investors cited by Reuters also said they believe a combined Yahoo and AOL could challenge Google and Facebook in the areas of video programming and the purchase of digital advertising. In its September letter, Starboard Value called out the area of digital advertising and said the combined companies could save up to $1 billion by cutting costs in the display business as well as in corporate overhead.

Digital advertising -- especially video and mobile ads -- has become a key part of Mayer's turnaround strategy. Yahoo on Tuesday announced it paid $640 million to acquire BrightRroll, a startup that helps customers buy and sell video ads on websites, mobile devices and connected TVs. The US market for Web video ads is expected to approach $6 billion by the end of 2014, said market research firm eMarketer.